Hitting retirement doesn’t come as a surprise; after all, most people have likely spent a large chunk of their life preparing for the end of work and ensuring they’ll be well provisioned for their golden days.
But while the need to build up a good level of retirement savings ahead of this is well-understood, few have given deep thought to the changes in investing mindset that should come about when they hit retirement age.
For the bulk of most people’s investment horizon, they have been focused on accumulation. Creating a decent retirement income is much easier if the investor has a good sized pot of money, so they will have spent up to 40 years or more investing with growth firmly in mind.
However, when retirement arrives the end of this accumulation phase comes with it and investors need to start thinking of their pot as something they have to live off, rather than something that should grow as high a rate as possible.
Ben Willis (pictured), head of research at Whitechurch Securities, says income, and how an investor can achieve their desired level of it, becomes the overriding concern once they enter retirement - although it's not the only thing they have to consider.
“You have to start looking at yielding instruments and you want to have a diversified portfolio, depending on your risk appetite,” he explained.
“Generally you’ll probably see someone wanting a mix of yielding assets that will blend equities, bonds and something like property. You’ll want that mix to deliver some gradual growth in capital with a nice yield on top.”
But investors shouldn’t just switch from accumulation shares to income shares in their top-performing growth fund.
FE Analytics shows the best performing fund in the IA All Companies sector returned more than 300 per cent over 10 years but has paid income of just under £1,800 on an initial investment of £10,000; in contrast, one of the more consistent income payers from the IA UK Equity Income sector has distributed nearly £5,500 over this time.
The move by investors towards income will force another mindset change, as they will have to get used to seeing a lower rate of growth from their portfolio than they have been used to for the previous decades of investing.
“They are going to be taking out the income that they need to live off,” Willis said. “They might have been lucky enough to see quite a high annualised growth rate on their portfolio, but they have to realise that this will start to look lower once the income has been stripped out.”
That’s not to say income is the only thing a retiree needs to think about. Capital preservation is another key concern - the last thing an income investor wants is for that precious pool of assets to start to diminish in size as this ultimately means their payouts will also fall.
Bob Wilson, financial adviser and director at GreenSky Wealth, notes that investors tend to become more cautious as they approach retirement because of this. This means they should pay less attention to performance-based metrics, such as where a fund sits in its sector rankings, and focus more on factors like volatility and maximum drawdown.
“I think they should be looking at volatility more than anything else,” Wilson said. “If you’ve been focused on a fund because it’s the best performing fund in its sector, this might be because it’s taking on a higher level of risk than any of its peers. It could then be the one that falls the furthest if that particular sector comes off.”
The traditional way of dampening down volatility in retirement has been through scaling back stock market investments and holding higher levels of cash and less risky assets such as bonds. Chase de Vere’s Patrick Connolly points out that this may no longer be appropriate given people’s longer lifespans.
“Gone are the days when you were aggressive when you’re young then take less and less risk as you approach retirement and when you get there you’re pretty much in cash and some fixed interest,” he said. “Many people, going forwards, will stay invested retirement and their retirement may last three decades or more. Being in cash and fixed interest means you will losing money in real terms.”
Iain Cunningham, co-manager on the Schroder Global Multi-Asset Income fund, agrees that diversification is essential for investors who rely on their investments for income, noting that a diversified mix of asset classes and securities, owned across multiple geographies, is crucial to achieving income and growth while minimising volatility.
“The core of our philosophy is the belief that investors desire a sustainable source of income that does not erode their capital. In order to achieve this sustainability of income, we believe investors should focus on diversifying their income sources, invest in higher quality assets and only invest in highly liquid securities,” he said.
“Through diversification an investor can reduce their exposure to the specific risk inherent within individual asset classes and securities. In doing so, the likelihood of suffering permanent capital loss can be significantly reduced.”
Willis says that avoiding a permanent capital loss should be at the forefront of investors’ minds, as all their hard work of previous decades can be undone should the markets turn.
With this in mind, he cautions against chasing a short-term boost for a retirement pot and says investors should be looking for funds that will serve them over the long term without taking on too much risk.
“If you retire and put that pot into something that’s high risk then we see a 20 per cent correction, you’re always going to be playing catch-up. You’ve spent all those years building that pot so you don’t want to put yourself in the position of destroying capital,” he said.
This article was written in collaboration with and is sponsored by Schroders.